As a new semester begins we want to take the opportunity to remind you of some of the education tax credits that might be available to you this year.
The American Opportunity Tax Credit (AOTC) is available for the first four years of higher education. The credit is worth up to $2,500 per year for each eligible student. The student must be attending school on at least a half-time basis to qualify for this credit.
The Lifetime Learning Credit (LLC) is available for higher education after the first four years of undergraduate studies. The credit is worth up to $2,000 and is nonrefundable.
Each credit is based on the qualified education expenses (tuition and fees) incurred for each student during the calendar year.
The education credits are subject to income limitation phase outs and other qualifications. Parents have the ability to shift the education credit to a child by not claiming the child as a dependent on their return. This allows parents who cannot benefit from the education credit because their AGI is too high to shift the credit to a child, regardless of whether the child or the parents pay the education costs. If the parents make a payment directly to an eligible educational institution for a student’s qualified tuition and related expenses, the student is treated as receiving the payment from his or her parents, and, in turn, paying the qualified tuition and related expenses to the institution [Reg. 1.25A-5(b)]. If the parents’ income is at a level where the deduction for dependency exemptions is phased out, forgoing the dependency exemption for the child does not materially impact their tax liability. The child must have sufficient income to generate enough tax liability to utilize the education credit for this strategy to be beneficial.
Please note that the education credits must be coordinated with 529 Plan distributions. A taxpayer cannot use the same expense to claim a nontaxable 529 Plan distribution and an education credit. Typically, the 529 Plan distribution is used for room/board and tuition/fees not covered by the education credit.
Please contact us to determine how you might best utilize the credits available to you based on your individual tax situation